Tech Startups: Take the Money and Build

Howard Tullman is the CEO of Chicago-based 1871, where, at the moment, 260 digital startups are building their businesses every day. He is also the general managing partner of G2T3V and Chicago High Tech Investors--both early-stage venture funds; a member of Mayor Emanuel’s ChicagoNEXT Innovation Council; and Governor Quinn’s Illinois Innovation Council. He is an adviser to many technology businesses and an adjunct professor at the Kellogg Graduate School of Management. @tullman

It's great to live and work in Chicago. We're west of all the fear and frenzy that make New York so nutty and east of all the fame seekers and fruitcakes that make the Valley so frothy and volatile. In Chicago, we build businesses, not bubbles, and in our city, bootstrapping is seen as a virtue to be proud of, not a vice of the petite bourgeoisie.

So we were glad to hear Jon Medved (the Israel-based founder and CEO of OurCrowd, the hottest equity crowdfunding operation in the world) say during a presentation at 1871 (a Chicago-based tech startup incubator of which I am CEO) that "flat is the new up." Loosely translated, he meant that there's no shame in taking in additional capital and bolstering your war chest when the opportunity presents itself, regardless of whether you're also able to secure an immediate step-up in the putative value of your early-stage business.

It's important to always remember, as Jon also reminded the audience, that the only truly fatal mistake for a startup is to run out of cash. When you do that, they send you to the showers. Everything else is fixable. As I used to say, anything that you can fix with a check isn't a problem, it's just another choice. But when you run out of cash, they pretty much run you out of town.

Now you might say that Jon's a VC (and he is, but I think, in his heart, he's really more of an entrepreneur) and that it's in his interest to keep the valuations of the follow-on rounds of startup financing flat rather than constantly and automatically ticking up--especially those deals in which his fund has invested. And that would be true. But that's not the main idea or the overall message that I took away from his comment; there were also valuable insights embedded in that simple phrase.

A VC Boom for Tech Start-ups

Let's reflect on where things stand and where we're headed in today's pretty bullish (at least for new businesses) investment environment. Because it's easy for bullish times to lead to bad behavior.

I'll start with a word of caution: The worst mistakes in business are made in good times, not in bad times. It's a remarkable fact of life that a small (and shrinking) bank account does a great deal to focus your attention on the things that are mission critical and existential. You stop taking limos to the airport pretty quickly when you're starting to worry about next week's lunch money. I've been in that position several times and, although it's good for your waistline, it's a lousy way to live.

But when funds are theoretically much easier to come by (at least in the current opinion of so many tech pundits and pontificators) and those funds are being offered in ever-increasing amounts, it's very tempting to grab the gold. But just don't lose your way or lose sight of the most important goals for your business.

That's why an emphasis on the mainly artificial bogie of interim valuations (the math) is woefully misplaced when what really matters is only getting the investment (the money). Until you sell your business or take it public, interim valuations are just so much chatter and cheap talk--not worth the time to talk about and temporary fantasies at best. It's a lot like wetting your pants in a dark suit: It gives you a nice warm feeling for a moment, and no one else really notices or cares, but you end up stinking up the place.

So when the opportunity presents itself to boost your bankroll, strike while the iron is hot, but remember these three basic rules of early-stage fundraising:

1. Getting money is just like eating appetizers. You do it when they are being served. Don't be reticent or late to the buffet.

2. Don't be a hog on valuation. There are a million other deals competing for those same funds; many are just as attractive as yours, and some will be much better priced than yours. Pigs get fat; hogs get slaughtered. Just like on Wall Street, easy money is what everyone else raises: Getting yours will always be hard until it's done and in the bank.

3. Take more money than you need, because you will need it, maybe for good reasons (radical growth or expansion) or for bad reasons (disappointing or delayed results), but need it you will.

Ultimately, if you can't entirely resist being a bit of a hog on valuation, at least be the practical one, just like in the storybooks. Take all the money you can get, say "thank you" (and not another word), and run like the wind.